The dangers of “pass” or assignment of the contract in the sale of real estate

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Do you know the risks of the “pass” or the transfer of a purchase and sale contract with a down payment on a home?

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When prices go up, "pass" operations proliferate in home purchases. In certain circles, it is common for someone you know to comment on the money easily earned by making a "pass", practically effortless. And the rest of the friends wonder,

What is the "pass" of a home?

Normally it is understood by the cession of a contract of sale with down payment of a property. It consists of signing a sales contract with the developer, normally off plane, for a while later, assign the contract to a third party who is willing to pay a higher price, the cedant keeping the difference.

Let's take an example.

Juan finds a promotion in which an apartment under construction is sold for 200.000 euros. Consider that it is an interesting price and that this apartment can be sold for 250.000 euros.

Sign a deposit agreement with the developer and deliver 50.000 euros. This way you will only be missing 150.000 euros payable.

Luis is willing to pay 250.000 euros for the flat. So she agrees with Juan to give him her earnest money contract 100.000 euros. With this amount of 100.000 plus the € 150,000 that Juan was missing for paying the promoter, will have managed to buy the house for 250.000 euros which was the price he considered correct.

Juan for his part, paid 50.000 for the down payment contract and receive € 100,000: A difference of 50.000 euros in a few months.

Everything seems very nice but reality is usually not that simple.

On the one hand there is the economic risk: It may not be easy to find a buyer willing to pay more for the home..

On the other are the tax implications that we will discuss below.

What is the assignment of the purchase contract?

In the Civil Code there is no specific regulation of the assignment of the home sales contract, although it is perfectly admissible relying on the principle of freedom of covenants contained in its article 1255.

It is important to highlight that said assignment (unlike what happens with credit assignments), requires the consent of the seller.   This consent can be express or tacit, ex ante or even later, but it must exist.

It is normally provided for in the purchase agreement with deposit, including a clause that comes to say the following:

"The selling party authorizes and consents to the transfer by the buyer of the rights granted by this contract to a third party of their choice."

The third party is subrogated in the position of the original buyer without the need for even a new contract..

In this manner, once the promoter communicates the date of writing before a notary, the third party will present itself and will acquire the home instead of the original buyer.

Economic risk of the "pass" of the sale

If for any circumstance such as an economic crisis or other circumstance the transferor does not obtain its transferee, the developer will demand the fulfillment of the contract. And here a multitude of legal controversies are generated. The "transferors" seek a legal basis to obtain the resolution of the purchase agreement with arrears. And the seller demands its compliance.  In these cases, The main argument of the transferor is usually the failure to meet the delivery deadline. But for the delay to be considered as an event of default, it is required that the end of the contract be frustrated. (judgments of the First Chamber of the Supreme Court of 25 June 2009 and 12 March 2009). A mere delay is not sufficient for resolution, except in cases of special relevance of time or of the timely fulfillment of the provision (SAP Algeciras S7 20 March 2013).

So the promoter will demand the fulfillment of the contract and the payment of the rest of the price.

Risk of "bridging" in the “pass”

There are frequent cases in which the final buyer contacts the seller directly, to try "eliminate the broker". The developer relies on any delay to try to terminate the sale and purchase agreement with the transferor and thus sell the property to the final transferee, obtaining a price higher than that agreed with the original buyer. These cases often end before the Courts with the consequent expenses generated and lost time. In this sense, the SAP Soria S1 of 13 April 2010:

"In our case, We agree with the Judge a quo that there is no doubt that the only reason for the rescission of the down payment contract by the vendors is the actor's own actions., quien, outside the down payment contract, sought a sale and purchase business outside the assignment, directly promoting the termination given the greater benefit that the new offer implied for HOTEL LEONOR SL and sellers. As reflected in the appealed judgment, Compliance with the assignment contract would have implied that the sale had been completed for the price of € 2,764,646., resulting from adding the 2.031.390 that the amount of € 751,256 must be paid, which was the transfer price. After the maneuver carried out to terminate the deposit agreement and enter into a new sales contract with the owners, the acquisition of the property would cost the transferee the sum of € 2,467,150, amount resulting from adding to the new sale price (2.677.505€) € 210,355 corresponding to the part of the transfer price paid, the return of which was not obtained by the transferors according to the third stipulation of the transfer contract, and subtract the duplicated down payments of € 420,710 received from the sellers as compensation for the sale price, being, also, for sellers, more advantageous the sale to receive a higher price. "

Tax risk of “passes” in the sale

Especially relevant is the fiscal risk.

If the transferor is an entrepreneur, upon assignment of the contract you must charge VAT, than in the previous example, will be from 21% of 150.000 euros, the value of the assigned right, namely 31.500 euros. To Luis, the final buyer, it increases the cost considerably.

Yes Juan, the transferor is particular, Said assignment of the sale contract will be taxed by ITP and Luis must settle between 6 and 10% according to the Autonomous Community in question, which will be applied to the total price of the sale (250.000€ in our example).

If things are done well, the assignee, Luis, should pay twice the ITP, one when the sale contract is assigned and the other, when the sale is raised to notarial deed. The sum of both quantities at the end is very relevant for the buyer.

In conclusion

For "the pass" or assignment of a real estate purchase and sale contract with down payment, the consent of the seller is necessary, which may be reflected in the contract itself. But the operation involves risks that make it essential to seek advice from a expert real estate lawyer.

Consult your case now

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